Financial Planning 101: Rising Rates and Long-Term Investors

Former President George H.W. Bush famously said, “Stay the course.” Long-term investors, who may be facing higher interest rates, might want to consider Bush’s words when it comes to their financial planning.

When interest rates (and mortgage rates) start climbing, as they did in late 2016, it can cause fear, especially for people juggling a number of priorities such as raising children, saving for retirement and education costs, and paying mortgages. Any new borrowing, and any current variable rate loan, could get more costly.

Sometimes there’s a temptation to do something quickly to deal with the changing climate. But a measured, cautious approach may be warranted.

“Generally speaking, it’s much of the same,” says Robert Siuty, Senior Financial Consultant, TD Ameritrade. “At end of the day, you have to make sure you’re not taking on unnecessary risk, and that you keep accumulating and saving toward your goal, whatever that goal might be: Retirement, a second home or education costs.”

Miss Your Chance to Refinance your Mortgage? Not Necessarily

Refinancing applications fell sharply as the 30-year mortgage rate climbed from 3.5% to above 4%. You may already be at a rate you can handle and don’t need to make a move now. If so, perhaps the “stay the course” rule may apply.

But if you’re unhappy with that monthly payment, you may still be in a situation where refinancing makes sense.

“You didn’t necessarily miss the boat,” says Shawn Cruz, Trader Content Specialist at TD Ameritrade. “Some people might still find it advantageous to refinance, but it may differ from person to person. If your personal financial condition has improved and your credit rating has improved, maybe earlier you could only get a 5% to 6% rate, but now you could qualify for refinancing” at a lower rate.

Savings Conundrum: Rates Rising, But Bank Accounts Still Yield Little

Those emergency funds many of us have sitting in CDs and savings accounts make so little interest that it’s hard to remember the days of collecting 5% on cash. Just because rates are rising doesn’t necessarily mean those times are coming back. Even current rates remain historically low, though the Fed has predicted three more hikes in 2017. Perhaps you’re tired of coming away each year with pennies for every $100, but financial professionals commonly claim it’s a good idea to keep three-to-six months of living funds put away in such accounts, just in case of emergency, Siuty said. For money that remains after that’s in place, fixed income may start looking more attractive. Recently, 10-year Treasury bonds paid about a 2.5% yield. “As interest rates go up, that should benefit savers more,” Siuty says.

Investment Portfolio: Time for a Change?

It’s easy to get swept up in a rally like the one that followed the election, but long-term investors probably don’t want to let that affect their overall plans.

“Longer-term investors prefer to stick to their discipline and stay the course,” Siuty says. “That means having a well-diversified portfolio across asset classes, and an appropriate mix based on their risk profile. They should also monitor and rebalance as appropriate.”

Additionally, rising rates often come during inflationary periods, another factor to watch. “If pressure builds and pushes inflation higher, that could affect more interest rate-sensitive sectors like utilities, and industrials as well,” Cruz says.

In an inflationary scenario, industrial stocks could conceivably be hurt by the higher cost of financing new projects. Utilities could sag as some investors abandon them for higher-yield fixed income, and real estate stocks could be hit by rising mortgage rates. If these sectors start to see a major impact from higher rates, there could come a time to consider moving some funds into less rate-sensitive categories.

But remember, just because the Fed seems to have entered a rate-hiking mode doesn’t mean it’s set in stone. After all, in 2016, the Fed predicted four rate increases and ended up making just one, which reminds us about the value of staying the course.

Need Help Managing Your Portfolio?

Get the help you need to pursue your financial goals. Whether you’re new to investing or looking to supplement an existing portfolio, TD Ameritrade Investment Management, LLC offers a suite of managed portfolios to help you manage your money.

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

This link takes you outside the TD Ameritrade Web site.

Clicking this link takes you outside the TD Ameritrade website to
a web site controlled by third-party, a separate but affiliated company.
TD Ameritrade is not responsible for the content or services this website.
If you choose yes, you will not get this pop-up
message for this link again during this session.

You are now leaving the TD Ameritrade Web site and will enter an
unaffiliated third-party website to access its products and its
posted services. The third-party site is governed by its posted
privacy policy and terms of use, and the third-party is solely
responsible for the content and offerings on its website. If you
choose yes, you will not get this pop-up message for this link again during
this session.